Economists turn bullish on Brazil 2017 growth as interest rates fall

SAO PAULO (Reuters) - Several economists are turning bullish on a return to growth in the Brazilian economy following months of downward revisions to forecasts as slowing inflation fuels bets on aggressive interest rate cuts.

The upswing in confidence suggests Latin America’s largest economy may finally be heading for a recovery from a brutal two-year recession after frustrated expectations of a rebound last year.

This may be the first in an incoming series of upward revisions. Key forecasters, such as Banco Santander Brasil, say risks are skewed to the upside following a slew of move positive economic data, from improvements in confidence surveys to rising industrial output.

For economist Gustavo Arruda of BNP Paribas, the economy is likely to grow 1 percent this year, in line with government estimates.

“We still believe that the combination of stronger sentiment, lower rates and advancing reforms is likely to confirm that the recession has been left behind,” he told Reuters.

For years, the Brazilian economy underperformed analyst expectations as it sank into its deepest recession on record.

Hopes that it could emerge from the downturn in the second half of last year proved misplaced amid political uncertainty and falling commodities prices.

The economic rout helped push inflation from a double-digit annual rate in 2015 to near the government’s 4.5 percent target this year, allowing the central bank to embark on the first rate-cutting cycle in four years.

Traders and economists expect the benchmark Selic overnight lending rate, now at 13 percent, to end the year in single digits.

Economists say that could be the missing piece in the puzzle, lifting the economy out of the two-year recession just as President Michel Temer presses ahead with business-friendly reforms to pensions and labor rules.

Still, skeptics say it may be too soon to bet on a V-shaped recovery, citing a bout of mixed forward-looking economic indicators such as heavy-vehicle traffic and cardboard output.

“There is good news but it is not yet translating into higher growth,” Banco Fator chief economist José Francisco Gonçalves said. “Lower rates are important, but not sufficient.”

He added that he will likely improve his forecast of a 0.2 percent GDP contraction this year, but to a figure “closer to zero than to 1 percent.”

The median estimate in a central bank poll of economists points to 0.48 percent growth this year, accelerating to 2.30 percent in 2018.

Reporting by Luiz Gerbelli; Writing by Bruno Federowski; Editing by James Dalgleish